Question 1

If the exchange rate is 97 U.S. cents per Canadian dollar, then

Accepted Answer

A) the Canadian dollar is cheaper than the U.S. dollar. 
B) the U.S. dollar is more expensive than the Canadian dollar. 
C) the Canadian dollar will appreciate. 
D) one U.S. dollar will buy 1.03 Canadian dollars. 
E) one U.S. dollar will buy 0.97 Canadian dollars. 
A) the Canadian dollar is cheaper than the U.S. dollar. 
B) the U.S. dollar is more expensive than the Canadian dollar. 
C) the Canadian dollar will appreciate. 
D) one U.S. dollar will buy 1.03 Canadian dollars. 
E) one U.S. dollar will buy 0.97 Canadian dollars.

Question 2

All of the following statements are true except

Accepted Answer

A) China's exchange rate policy increases exports in the long run. 
B) China's exchange rate policy is mainly an attempt to control inflation. 
C) China's exchange rate policy results in a yuan that has a lower foreign exchange rate against the U.S. dollar than it would otherwise have. 
D) China's exchange rate policy does not impact the real exchange rate in the long run. 
E) All of the above are true. 
A) China's exchange rate policy increases exports in the long run. 
B) China's exchange rate policy is mainly an attempt to control inflation. 
C) China's exchange rate policy results in a yuan that has a lower foreign exchange rate against the U.S. dollar than it would otherwise have. 
D) China's exchange rate policy does not impact the real exchange rate in the long run. 
E) All of the above are true.

Question 3

Complete the following sentence. Foreign borrowing

Accepted Answer

A) always leads to a lower level of consumption in the future for the debtor nation because part of its future GDP is used to pay off the foreign debt. 
B) always leads to a higher level of consumption in the future for the debtor nation because foreign borrowing enables a greater than otherwise possible increase in the nation's capital stock. 
C) could lead to higher consumption levels in the future, if the borrowing is used to finance investment that generates economic growth. 
D) could lead to lower consumption levels in the future, if the borrowing is used for current consumption. 
E) C and D 
A) always leads to a lower level of consumption in the future for the debtor nation because part of its future GDP is used to pay off the foreign debt. 
B) always leads to a higher level of consumption in the future for the debtor nation because foreign borrowing enables a greater than otherwise possible increase in the nation's capital stock. 
C) could lead to higher consumption levels in the future, if the borrowing is used to finance investment that generates economic growth. 
D) could lead to lower consumption levels in the future, if the borrowing is used for current consumption. 
E) C and D

Question 4

Which one of the following is a balance of payments account?

Accepted Answer

A) capital and financial account 
B) foreign exchange account 
C) saving account 
D) trade account 
E) all of the above 
A) capital and financial account 
B) foreign exchange account 
C) saving account 
D) trade account 
E) all of the above

Question 5

The current account records

Accepted Answer

A) net exports, net interest income and net transfers. 
B) net value of Canadian investments and foreign investments. 
C) current government expenditure. 
D) current consumption expenditure. 
E) current investment. 
A) net exports, net interest income and net transfers. 
B) net value of Canadian investments and foreign investments. 
C) current government expenditure. 
D) current consumption expenditure. 
E) current investment.

Question 6

If a country's central bank does not intervene in the foreign exchange market, the country has

Accepted Answer

A) a crawling peg exchange rate policy. 
B) a fixed exchange rate policy. 
C) a flexible exchange rate policy. 
D) no exchange rate policy. 
E) a responsible exchange rate policy. 
A) a crawling peg exchange rate policy. 
B) a fixed exchange rate policy. 
C) a flexible exchange rate policy. 
D) no exchange rate policy. 
E) a responsible exchange rate policy.

Question 7

The Bank of Canada

Accepted Answer

A) has no influence on the exchange rate. 
B) sells Canadian dollars to the United States in an attempt to depreciate the Canadian dollar and increase Canadian exports to the United States. 
C) alternates between a flexible, fixed, and crawling peg exchange rate policy depending on economic conditions. 
D) follows a flexible exchange rate policy, although the Bank's actions can impact the exchange rate. 
E) buys Canadian dollars from the United States in an attempt to depreciate the Canadian dollar and increase Canadian exports to the United States. 
A) has no influence on the exchange rate. 
B) sells Canadian dollars to the United States in an attempt to depreciate the Canadian dollar and increase Canadian exports to the United States. 
C) alternates between a flexible, fixed, and crawling peg exchange rate policy depending on economic conditions. 
D) follows a flexible exchange rate policy, although the Bank's actions can impact the exchange rate. 
E) buys Canadian dollars from the United States in an attempt to depreciate the Canadian dollar and increase Canadian exports to the United States.

Question 8

Refer to the figure below to answer the following questions.
   
Figure 25.3.1
-In Figure 25.3.1, suppose the demand for dollars temporarily increases so that the demand curve shifts to D₁. To maintain the target exchange rate, the Bank of Canada

Accepted Answer

A) sells dollars. 
B) buys dollars. 
C) must violate interest rate parity but not purchasing power parity. 
D) must raise the target exchange rate. 
E) must lower the target exchange rate. 
A) sells dollars. 
B) buys dollars. 
C) must violate interest rate parity but not purchasing power parity. 
D) must raise the target exchange rate. 
E) must lower the target exchange rate.

Question 9

Airbus is a European producer of airliners. Indian Airlines wants to buy 23 Airbus planes from Airbus because of an increased demand for world travel. The currency of India is the rupee. The currency of the European Union is the euro. As a result,

Accepted Answer

A) the supply curve of euros shifts rightward. 
B) the supply curve of euros shifts leftward. 
C) the demand curve for rupees shifts rightward. 
D) the demand curve for euros shifts leftward. 
E) demand curve for euros shifts rightward. 
A) the supply curve of euros shifts rightward. 
B) the supply curve of euros shifts leftward. 
C) the demand curve for rupees shifts rightward. 
D) the demand curve for euros shifts leftward. 
E) demand curve for euros shifts rightward.

Question 10

Choose the statement that is incorrect.

Accepted Answer

A) A large current account deficit emerged in Canada during the 1980s. 
B) Canada's current account moved into a surplus in the 2000s. 
C) Canada's current account moved into a deficit after 2008. 
D) Canada's capital and financial account balance is almost a mirror image of the current account balance. 
E) Canada's official settlements balance is very large in comparison with the current account and the capital and financial account. 
A) A large current account deficit emerged in Canada during the 1980s. 
B) Canada's current account moved into a surplus in the 2000s. 
C) Canada's current account moved into a deficit after 2008. 
D) Canada's capital and financial account balance is almost a mirror image of the current account balance. 
E) Canada's official settlements balance is very large in comparison with the current account and the capital and financial account.

Question 11

When would the exchange rate rise the most?

Accepted Answer

A) The supply of and demand for dollars both increase. 
B) The supply of dollars increases, and the demand for dollars decreases. 
C) The supply of dollars decreases, and the demand for dollars increases. 
D) The supply of and demand for dollars both decrease. 
E) The Bank of Canada intervenes. 
A) The supply of and demand for dollars both increase. 
B) The supply of dollars increases, and the demand for dollars decreases. 
C) The supply of dollars decreases, and the demand for dollars increases. 
D) The supply of and demand for dollars both decrease. 
E) The Bank of Canada intervenes.

Question 12

At the equilibrium exchange rate,

Accepted Answer

A) the demand for dollars equals the supply of dollars. 
B) a shortage may exist but a surplus may not exist. 
C) a surplus may exist but a shortage may not exist. 
D) the quantity of dollars demanded equals the quantity of dollars supplied. 
E) the Canadian dollar is trading for 100 U.S. cents per Canadian dollar. 
A) the demand for dollars equals the supply of dollars. 
B) a shortage may exist but a surplus may not exist. 
C) a surplus may exist but a shortage may not exist. 
D) the quantity of dollars demanded equals the quantity of dollars supplied. 
E) the Canadian dollar is trading for 100 U.S. cents per Canadian dollar.

Question 13

Use the table below to answer the following questions.
Table 25.4.1
  
-Refer to Table 25.4.1. The country Mengia came into existence at the beginning of year 1. Given the information, in year 4 Mengia is a

Accepted Answer

A) net lender and a creditor nation. 
B) net lender and a debtor nation. 
C) net borrower and a creditor nation. 
D) net borrower and a debtor nation. 
E) net lender and neither a creditor nor a debtor nation. 
A) net lender and a creditor nation. 
B) net lender and a debtor nation. 
C) net borrower and a creditor nation. 
D) net borrower and a debtor nation. 
E) net lender and neither a creditor nor a debtor nation.

Question 14

Suppose that a country's government expenditures are $500 billion, net taxes are $400 billion, saving is $200 billion, and investment is $250 billion. Net exports are a

Accepted Answer

A) surplus of $150 billion. 
B) surplus of $50 billion. 
C) deficit of $150 billion. 
D) deficit of $50 billion. 
E) deficit of $250 billion. 
A) surplus of $150 billion. 
B) surplus of $50 billion. 
C) deficit of $150 billion. 
D) deficit of $50 billion. 
E) deficit of $250 billion.

Question 15

Use the information below to answer the following questions.
Fact 25.4.1
You are given the following information about the country of Ecoland, whose currency is the turkey, and whose official settlements balance is zero.
  
-Refer to Fact 25.4.1. What is the value of the private sector deficit or surplus?

Accepted Answer

A) zero 
B) -3 billion turkeys 
C) -1 billion turkeys 
D) -2 billion turkeys 
E) +1 billion turkeys 
A) zero 
B) -3 billion turkeys 
C) -1 billion turkeys 
D) -2 billion turkeys 
E) +1 billion turkeys

Question 16

China has used a fixed yuan exchange rate and a crawling peg exchange rate. In both cases, China pegs its currency to the

Accepted Answer

A) U.S. dollar. 
B) Japanese yen. 
C) euro. 
D) Mexican peso. 
E) Russian ruble. 
A) U.S. dollar. 
B) Japanese yen. 
C) euro. 
D) Mexican peso. 
E) Russian ruble.

Question 17

Suppose that the following situation exists in the foreign exchange market: 1 Canadian dollar buys $1.05 U.S, and 1 Canadian dollar buys 8.6 Chinese yuan. How many yuan will $1 U.S. buy?

Accepted Answer

A) 8.6 yuan 
B) 1.0 yuan 
C) 8.2 yuan 
D) 0.12 yuan 
E) 0.14 yuan 
A) 8.6 yuan 
B) 1.0 yuan 
C) 8.2 yuan 
D) 0.12 yuan 
E) 0.14 yuan

Question 18

Suppose that a country's government expenditures are $400 billion, net taxes are $300 billion, saving is $300 billion, and investment is $250 billion. Net exports are a

Accepted Answer

A) surplus of $150 billion. 
B) surplus of $50 billion. 
C) deficit of $150 billion. 
D) deficit of $50 billion. 
E) deficit of $250 billion. 
A) surplus of $150 billion. 
B) surplus of $50 billion. 
C) deficit of $150 billion. 
D) deficit of $50 billion. 
E) deficit of $250 billion.

Question 19

The exchange rate is volatile because

Accepted Answer

A) government policy promotes interest rate fluctuation. 
B) the demand curve for foreign exchange is very flat. 
C) the demand curve for foreign exchange is very steep. 
D) the supply curve of dollars is vertical. 
E) the supply of dollars and demand for dollars are influenced by similar events. 
A) government policy promotes interest rate fluctuation. 
B) the demand curve for foreign exchange is very flat. 
C) the demand curve for foreign exchange is very steep. 
D) the supply curve of dollars is vertical. 
E) the supply of dollars and demand for dollars are influenced by similar events.

Question 20

A change in the exchange rate, other things remaining the same, brings a

Accepted Answer

A) shift of the supply curve for Canadian dollars with no movement along the supply curve. 
B) change in the quantity of Canadian dollars supplied and a shift of the supply curve. 
C) shift of the supply curve for Canadian with a movement along the demand curve. 
D) change in the quantity of Canadian dollars supplied with no movement along the supply curve. 
E) change in the quantity of Canadian dollars supplied and a movement along the supply curve. 
A) shift of the supply curve for Canadian dollars with no movement along the supply curve. 
B) change in the quantity of Canadian dollars supplied and a shift of the supply curve. 
C) shift of the supply curve for Canadian with a movement along the demand curve. 
D) change in the quantity of Canadian dollars supplied with no movement along the supply curve. 
E) change in the quantity of Canadian dollars supplied and a movement along the supply curve.

Exam 25: The Exchange Rate and the Balance of Payments

If the exchange rate is 97 U.S. cents per Canadian dollar, then

All of the following statements are true except

Complete the following sentence. Foreign borrowing

Which one of the following is a balance of payments account?

The current account records

If a country's central bank does not intervene in the foreign exchange market, the country has

The Bank of Canada

Refer to the figure below to answer the following questions. Figure 25.3.1 -In Figure 25.3.1, suppose the demand for dollars temporarily increases so that the demand curve shifts to D₁. To maintain the target exchange rate, the Bank of Canada

Airbus is a European producer of airliners. Indian Airlines wants to buy 23 Airbus planes from Airbus because of an increased demand for world travel. The currency of India is the rupee. The currency of the European Union is the euro. As a result,

Choose the statement that is incorrect.

When would the exchange rate rise the most?

At the equilibrium exchange rate,

Use the table below to answer the following questions. Table 25.4.1 -Refer to Table 25.4.1. The country Mengia came into existence at the beginning of year 1. Given the information, in year 4 Mengia is a

Suppose that a country's government expenditures are $500 billion, net taxes are $400 billion, saving is $200 billion, and investment is $250 billion. Net exports are a

China has used a fixed yuan exchange rate and a crawling peg exchange rate. In both cases, China pegs its currency to the

Suppose that the following situation exists in the foreign exchange market: 1 Canadian dollar buys $1.05 U.S, and 1 Canadian dollar buys 8.6 Chinese yuan. How many yuan will $1 U.S. buy?

Suppose that a country's government expenditures are $400 billion, net taxes are $300 billion, saving is $300 billion, and investment is $250 billion. Net exports are a

The exchange rate is volatile because

A change in the exchange rate, other things remaining the same, brings a

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